What Happens If I Don't Pay Back My Debt?

Do you ever feel like you are drowning in debt? Have you ever considered simply not paying your debts? What's the worst that can happen if you refused to pay them back?

Unless you owe that debt to the "unregulated" end of the high-risk loan market, nobody named Vito is going to show up and break your kneecaps. However, you can't simply walk away from your debts and expect no consequences. Despite your wishes, the student loan fairy or the credit card fairy is not going to appear and magically remove your debt obligations.

Consider the effects of ignoring different varieties of debt.

Student Loans – Eventually, you could end up in court as your lender or a collection agency sues you to recover your loan. The government holds a major hammer with federal student debt. Once your loan goes into default, they can extract money from you through garnishment – wages, federal tax refunds, and even Social Security benefits. Private lenders that supply student loans will generally be forced to sue you under applicable state law to recover their funds. The good news: they can't repossess your brain! Find out quickly at what rate you can refinance your student loan.

Medical Debt – Again, court is the likely outcome. Collection agencies will take you to court to attempt to recover the charges. It's easy to fall into medical debt because billing is extremely confusing and time delays can leave you with a significant bill and a minimum amount of time to address it. You can minimize the effect by checking for billing errors and working with your provider and insurer to find an acceptable payment plan.

Mortgage Debt – Once you miss consecutive payments, your mortgage will be considered in default. After the third missed payment, you should receive a Demand Letter notifying you of your delinquency. After the fourth missed payment, your home will undergo foreclosure and eventually be auctioned off.

Since your debt is secured by an asset (your home), there may not be any legal repercussions for you – you simply will lose your home. However, if the sale of the home does not cover the amount owed to the bank, the bank may be able to seek a deficiency judgment against you in court depending on the terms of the loan and the deficiency judgment laws in your state.

Auto Debt – As with mortgage debt, you could simply lose the asset that you were paying for. Details will depend on your specific contract. But after a certain time without payment, your lender has the right to repossess your car. They cannot "breach the peace" in doing so, but rest assured that you can only avoid repossession for a short time. If your car is then sold for less than you owe, you could be held liable for the balance.

Credit Card Debt – Aside from building up interest on the unpaid balance, the first consequence is usually late fees, followed by the application of an unpleasant penalty interest rate – usually 30% or greater. When your bill reaches 90 days past due, your account will generally be considered in default and closed out. Your debt is likely to be sold to third-party debt collectors who will apply escalating pressure to you to pay. Eventually, collectors will apply whatever methods are allowed by governing state law, such as lawsuits or liens.

All of these cases have one common side effect – destruction of your credit rating. If you have shown a history of not paying back your debt, why would anyone lend money to you again? It will take years to rebuild your credit, as defaulted debts and foreclosures stay on your report for seven years. During that time, you will find it hard to get credit and will pay significantly higher interest for any credit you do receive.

In short, it may be fun to fantasize about not paying back your debt, but it's better (and ultimately fulfilling) to meet your obligation. Set up a realistic budget that allows a surplus, and apply that surplus to your debt, no matter how small the surplus is. "The biggest thing you need to do to reduce your debt is widen the spread between your income and your expenses," says Millennial Money Expert Stefanie O'Connell. "To make that spread bigger, you have two options. You can earn more or spend less. The bigger you can get that spread, the more resources you have available to get that debt back down to zero." You'll gain momentum and get a positive feeling as your debt shrinks, and you won't have to worry about avoiding bill collectors and lawyers – or, in the worst case, Vito.